CRISIL maintains valuation grade of 5/5 to Spanco

Spanco Ltd’s (Spanco’s) December 2011 standalone numbers were in line with CRISIL Research’s expectations. The standalone results include the
performance of Nagpur DF only for the period till November 23, 2011 post which the business was transferred to a subsidiary company. Revenues from Nagpur DF for the entire quarter declined to ~Rs 1,200 mn compared to Rs 1,353 mn in the previous quarter on account of seasonality. Due to the transfer of business, EBITDA and PAT numbers of this quarter are not comparable with the previous quarter. Post interaction with the management, we will introduce FY13 forecast and revisit our estimates and fair value. We maintain the fundamental grade of 3/5.

December 2011 standalone result analysis
• Including the ~Rs 1,200 mn Nagpur DF business, revenues grew by 2% qo-q to Rs 5,119 mn. Adjusting for Nagpur DF, Spanco’s standalone revenues increased by 6.9% q-o-q (up 9.7% y-o-y) to Rs 3,920 mn.

• During the quarter, Spanco transferred its Nagpur DF business to its subsidiary Spanco Nagpur Discom Ltd with effect from November 23, 2011. Revenues from Nagpur DF were Rs 758 mn for the period from October 1, 2011 to November 22, 2011 compared to Rs 1,353 mn in the entire previous quarter.

• EBITDA margin improved by 116 bps q-o-q to 12.7% (down 432 bps y-oy) due to lower share of the Nagpur DF business in the standalone numbers. Margins in Nagpur DF are relatively lower as the project is in the stabilisation phase.

• PAT margin improved by 27 bps q-o-q (down 369 bps y-o-y) to 3.7%. EPS for December 2011 remained at Rs 5.5 similar to September 2011. Key developments

• Spanco was granted a five year tax holiday by the Nigerian government for its BPO operations in Nigeria. This will enable the company to improve profitability of its operations and invest further in Nigeria.

Valuation: Current market price has strong upside
We continue to use the sum-of-the-parts method to value Spanco. We have used the price multiple method to value the company except the Nagpur DF and MP border projects, which have been valued using the discounted cash flow method. We maintain our fair value of Rs 289 per share and valuation grade of 5/5.

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